The
condensed consolidated financial statements include the accounts of Rim
Semiconductor Company (“Rim Semi”) and its wholly-owned operating subsidiary, NV
Entertainment, Inc. (“NV Entertainment”) (collectively, the “Company”). All
significant intercompany balances and transactions have been eliminated.
The
Company consolidates its 50% owned subsidiary Top Secret Productions, LLC
due to
the Company’s control of management and financial matters of such entity,
including all of the risk of loss. Top Secret Productions, LLC is a 50% owned
subsidiary of NV Entertainment.
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America (“US GAAP”). In the opinion of management, the
accompanying unaudited financial statements contain all adjustments, consisting
only of those of a normal recurring nature, necessary for a fair presentation
of
the Company’s financial position, results of operations and cash flows at the
dates and for the periods indicated. These financial statements should be
read
in conjunction with the financial statements and notes related thereto included
in the Annual Report on Form 10-KSB for the fiscal year ended October 31,
2006.
These
results for the three months and six months ended April 30, 2007 are not
necessarily indicative of the results to be expected for the full fiscal
year.
The preparation of the consolidated financial statements in conformity with
US
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Rim
Semiconductor Company was incorporated under the laws of the State of Utah
on
December 5, 1985. In November of 1999, the Company began to focus its
business activities on the development of new semiconductor technologies.
Pursuant to such plan, in February of 2000, the Company acquired NV Technology,
Inc. and commenced its technology business. The Company’s technology business
has generated no revenues to date.
The
Company operates in two business segments, the production of motion pictures,
films and videos (Entertainment Segment) and development of new semiconductor
technologies (Semiconductor Segment). The Company’s Entertainment Segment is
dependent on future revenues from the Company’s film “Step Into Liquid”
(“Film”). The Semiconductor Segment is dependent on the Company’s ability to
successfully commercialize its developed technology.
Through
its subsidiary NV Entertainment the Company has had operating revenues for
its
Entertainment Segment, but may continue to report operating losses for this
segment. The Semiconductor Segment will have no operating revenues until
successful commercialization of its developed technology, but will continue
to
incur substantial operating expenses, capitalized costs and operating
losses.
Liquidity
Discussion
The
accompanying condensed consolidated financial statements have been prepared
in
conformity with accounting principles generally accepted in the United States
of
America, which contemplate the realization of assets and the satisfaction
of
liabilities in the normal course of business.
The
Company has significant recurring operating losses, used substantial funds
in
its operations, and needs to raise additional funds to accomplish its business
plan. For the three months ended April 30, 2007 and 2006, the Company incurred
net losses of approximately $122,000 and $9.7 million, respectively, and
approximately $7.9 million and $11 million for the six months ended April
30,
2007 and 2006, respectively. As of April 30, 2007, the Company has a working
capital deficiency of approximately $8.3 million. In addition, management
believes that the Company will continue to incur net losses and cash flow
deficiencies from operating activities through at least April 30,
2008.
In
January 2007, an institutional investor that had previously invested in the
Company committed to purchase $6 million of convertible debentures upon the
Company’s request at anytime through July 31, 2007. Management believes that the
net proceeds from this financing, together with $287,272 in cash as of April
30,
2007, is sufficient to fund the planned expenditures through at least April
30,
2008.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1 - PRINCIPLES OF CONSOLIDATION AND BUSINESS OPERATIONS
(CONTINUED)
Liquidity
Discussion
(Continued)
Management
of the Company is continuing its efforts to secure additional funds through
equity and/or debt instruments to fund ongoing operations. After April 30,
2008,
the Company may require additional funds for its operations and to pay down
its
liabilities, as well as finance its expansion plans consistent with its business
plan. However, there can be no assurance that the Company will be able to
secure
additional funds and that if such funds are available, whether the terms
or
conditions would be acceptable to the Company.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting
Estimates
The
preparation of the condensed consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosures of contingent assets and
liabilities in the condensed consolidated financial statements and the
accompanying notes. Significant estimates include impairment analysis for
long-lived assets, the individual-film-forecast computation method, income
taxes, litigation and valuation of derivative instruments. Actual results
could
differ from those estimates.
Revenue
Recognition
The
Company recognizes revenue from the sale of its semiconductor products when
evidence of an arrangement exists, the sales price is determinable or fixed,
legal title and risk of loss has passed to the customer, which is generally
upon
shipment of our products to our customers, and collection of the resulting
receivable is probable. To date the Company has not recognized any revenues
related to the sale of its semiconductor products.
The
Company recognizes film revenue from the distribution of its feature film
and
related products when earned and reasonably estimable in accordance with
Statement of Position 00-2, “Accounting by Producers or Distributors of Films”
(“SOP 00-2”). The following conditions must be met in order to recognize revenue
in accordance with SOP 00-2:
|
o |
persuasive
evidence of a sale or licensing arrangement with a customer
exists;
|
|
o |
the
film is complete and, in accordance with the terms of the arrangement,
has
been delivered or is available for immediate and unconditional
delivery;
|
|
o |
the
license period of the arrangement has begun and the customer can
begin its
exploitation, exhibition or sale;
|
|
o |
the
arrangement fee is fixed or determinable;
and
|
|
o |
collection
of the arrangement fee is reasonably
assured.
|
Under
a
rights Agreement with Lions Gate Entertainment (“LGE”) the domestic distributor
for its Film entitled “Step Into Liquid,” the Company shares with LGE in the
profits of the Film after LGE recovers its marketing, distribution and other
predefined costs and fees. The agreement provides for the payment of minimum
guaranteed license fees, usually payable on delivery of the respective completed
film, that are subject to further increase based on the actual distribution
results in the respective territory.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Research
and Development
Research
and development costs are charged to expense as incurred. Amounts allocated
to
acquired-in-process research and development costs, from business combinations,
are charged to operations at the consummation of the acquisition.
Research
and development expenses relate to the design and development of advanced
transmission technology products. In the past, the Company has outsourced
its
design and development activities to independent third parties, although
it is
not currently doing so. Internal development costs and payments made to
independent software developers under development agreements are capitalized
to
software development costs once technological feasibility is established
or if
the development costs have an alternative future use. Prior to establishing
technological feasibility, development costs and payments made are expensed
to
research and development costs. Technological feasibility is evaluated on
a
product-by-product basis.
Research
and development expenses generally consist of salaries, related expenses
for
engineering personnel and third-party development costs incurred.
Capitalized
Software Development Costs
Capitalization
of computer software development costs begins upon the establishment of
technological feasibility. Technological feasibility for the Company’s computer
software is generally based upon achievement of a detail program design free
of
high-risk development issues and the completion of research and development
on
the product hardware in which it is to be used. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized computer software development costs require considerable judgment
by
management with respect to certain external factors, including, but not limited
to, technological feasibility, anticipated future gross revenue, estimated
economic life and changes in software and hardware technology.
Amortization
of capitalized computer software development costs commences when the related
products become available for general release to customers. Amortization
is
provided on a product-by-product basis. The annual amortization is the greater
of the amount computed using (a) the ratio that current gross revenue for
a
product bears to the total of current and anticipated future gross revenue
for
that product, or (b) the straight-line method over the remaining estimated
economic life of the product. The estimated useful life of the Company’s
existing product is seven years.
The
Company periodically performs reviews of the recoverability of such capitalized
software development costs. At the time a determination is made that capitalized
amounts are not recoverable based on the estimated cash flows to be generated
from the applicable software, the capitalized cost of each software product
is
then valued at the lower of its remaining unamortized costs or net realizable
value.
Derivative
Financial Instruments
In
connection with the issuance of certain convertible debentures (see Note
8), the
terms of the debentures included an embedded conversion feature which provided
for a conversion of the debentures into shares of the Company’s common stock at
a rate which was determined to be variable. The Company determined that the
conversion feature was an embedded derivative instrument and that the conversion
option was an embedded put option pursuant to SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” as amended, and Emerging Issues
Task Force (“EITF”) Issue No. 00-19, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock.”
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Derivative
Financial Instruments
(Continued)
The
accounting treatment of derivative financial instruments requires that the
Company record the conversion option and related warrants at their fair values
as of the inception date of the convertible debenture agreements and at fair
value as of each subsequent balance sheet date. In addition, under the
provisions of EITF Issue No. 00-19, as a result of entering into the convertible
debenture agreements, the Company was required to classify all other
non-employee warrants and options as derivative liabilities and record them
at
their fair values at each balance sheet date. Any change in fair value was
recorded as non-operating, non-cash income or expense at each balance sheet
date. If the fair value of the derivatives was higher at the subsequent balance
sheet date, the Company recorded a non-operating, non-cash charge. If the
fair
value of the derivatives was lower at the subsequent balance sheet date,
the
Company recorded non-operating, non-cash income. The Company reassesses the
classification at each balance sheet date. If the classification required
under
EITF Issue No. 00-19 changes as a result of events during the period, the
contract is reclassified as of the date of the event that caused the
reclassification.
The
fair
value of derivative financial instruments was estimated during the six months
ended April 30, 2007 and 2006 using the Black-Scholes model and the following
range of assumptions:
|
Three
Months Ended April 30,
|
Six
Months Ended April 30,
|
|
2007
|
2006
|
2007
|
2006
|
Expected
dividends
|
None
|
None
|
None
|
None
|
|
|
|
|
|
Expected
volatility
|
47.9-134.1%
|
144.0-158.1%
|
47.9
- 136.9%
|
95.3%
|
|
|
|
|
|
Risk-free
interest rate
|
4.6-5.0%
|
4.3
- 4.9%
|
4.6
- 5.2%
|
4.5%
|
|
|
|
|
|
Contractual
term (years)
|
0.4
-9.3
|
3.0-10.0
|
0.4
- 9.5
|
2.3-10.0
|
The
expected volatility is based on a blend of the Company’s industry peer group and
the Company’s historical volatility. The risk-free interest rate assumption is
based upon observed interest rates appropriate for the term of the related
stock
options and warrants. The dividend yield assumption is based on the Company’s
history and expectation of dividend payouts. The expected life of stock options
and warrants represents the Company’s historical experience with regards to the
exercise behavior of its option and warrant holders and the contractual term
of
the options and warrants.
Loss
Per Common Share
Basic
loss per common share is computed based on weighted average shares outstanding
and excludes any potential dilution. Diluted loss per share reflects the
potential dilution from the exercise or conversion of all dilutive securities
into common stock based on the average market price of common shares outstanding
during the period.
For
the
three months and six months ended April 30, 2007 and 2006, no effect has
been
given to outstanding options, warrants, convertible notes payable, or
convertible debentures in the diluted computation, as their effect would
be
anti-dilutive.
Stock-Based
Compensation
The
Company reports stock based compensation under accounting guidance provided
by
SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), which
requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors, including stock
options, based on estimated fair values.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Stock-Based
Compensation
(Continued)
SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company’s consolidated
statement of operations. Prior to the adoption of SFAS 123(R), the Company
accounted for stock-based awards to employees and directors using the intrinsic
value method in accordance with APB 25 as allowed under SFAS No. 123,
“Accounting for Stock-Based Compensation” (“SFAS 123”). Under the intrinsic
value method, no stock-based compensation expense for employee stock options
had
been recognized in the Company’s consolidated statement of operations because
the exercise price of the Company’s stock options granted to employees and
directors equaled the fair market value of the underlying stock at the date
of
grant.
SFAS
123(R) also requires that the cash retained as a result of the tax deductibility
of the increase in the value of share-based arrangements be presented as
a
component of cash flows from financing activities in the consolidated statement
of cash flows. Prior to the adoption of SFAS 123(R), such amounts were required
to be presented as a component of cash flows from operating activities. Due
to
the Company’s tax net operating loss position, the Company does not realize cash
savings as a result of the tax deduction for stock-based compensation.
Accordingly, the adoption SFAS 123(R) had no effect on the Company’s cash flows
from operating or financing activities for the six months ended April 30,
2007.
The
Company has continued to attribute the value of stock-based compensation
to
expense on the straight-line single option method.
Stock-based
compensation expense recognized under SFAS 123(R) related to employee stock
options was $117,183 and $227,948 for the three months and six months ended
April 30, 2007, respectively, and $378,802 and $447,839 for the three months
and
six months ended April 30, 2006, respectively. Stock-based-compensation expense
for share-based payment awards granted prior to, but not yet vested as of
October 31, 2005 based on the grant date fair value estimated in accordance
with
the provisions of SFAS 123 was $0 and $247,057 for the three months and six
months ended April 30, 2006, respectively.
Stock-based
compensation expense recognized for non-employees under other accounting
standards was $495,221 and $879,275 for the three months and six months ended
April 30, 2007, respectively, and $292,766 and $315,674 for the three months
and
six months ended April 30, 2006, respectively.
As
stock-based compensation expense recognized in the consolidated statement
of
operations for the three months and six months ended April 30, 2007 is based
on
awards ultimately expected to vest, it has been reduced for estimated
forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time
of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.
Impairment
of Long-Lived Assets
The
Company evaluates its long-lived assets for financial impairment, and continues
to evaluate them as events or changes in circumstances indicate that the
carrying amount of such assets may not be fully recoverable.
The
Company evaluates the recoverability of long-lived assets by measuring the
carrying amount of the assets against the estimated undiscounted future cash
flows associated with them. At the time such evaluations indicate that the
future undiscounted cash flows of certain long-lived assets are not sufficient
to recover the carrying value of such assets, the assets are adjusted to
their
fair values.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period
presentation. The reclassification did not have any effect on reported net
(losses) income for any periods presented.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Impact
of Recently Issued Accounting Standards
In
July
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an Interpretation of FASB Statement No. 109” (the
“Interpretation”). The Interpretation establishes for all entities a minimum
threshold for financial statement recognition of the benefit of tax positions,
and requires certain expanded disclosures. The Interpretation is effective
for
fiscal years beginning after December 31, 2006, and is to be applied to all
open
tax years as of the date of effectiveness. The Company is in the process
of
evaluating the impact of the application of the Interpretation to its financial
statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair
value in accordance with accounting principles generally accepted in the
U.S.,
and expands disclosures about fair value measurements. SFAS 157 is effective
for
the Company as of the beginning of fiscal year 2009, with earlier application
encouraged. Any cumulative effect will be recorded as an adjustment to the
opening accumulated deficit balance, or other appropriate component of equity.
The adoption of this pronouncement is not expected to have an impact on the
Company’s consolidated financial position, results of operations, or cash
flows.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159
provides companies with an option to report selected financial assets and
liabilities at fair value. The objective of SFAS 159 is to reduce
both complexity in accounting for financial instruments and the volatility
in
earnings caused by measuring related assets and liabilities differently.
Generally accepted accounting principles have required different measurement
attributes for different assets and liabilities that can create artificial
volatility in earnings. The FASB has indicated it believes that
SFAS 159 helps to mitigate this type of accounting-induced volatility by
enabling companies to report related assets and liabilities at fair value,
which
would likely reduce the need for companies to comply with detailed rules
for
hedge accounting. SFAS 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and
liabilities.
SFAS 159
does not eliminate disclosure requirements included in other accounting
standards, including requirements for disclosures about fair value measurements
included in SFAS 157 and SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments.” SFAS 159 is effective for the Company as of the
beginning of fiscal year 2009. The Company has not yet determined the impact
SFAS 159 may have on its consolidated financial position, results of operations,
or cash flows.
In
December 2006, the FASB approved FASB Staff Position (FSP) No. EITF
00-19-2, “Accounting for Registration Payment Arrangements” (“FSP EITF
00-19-2”), which specifies that the contingent obligation to make future
payments or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included as a provision
of a financial instrument or other agreement, should be separately recognized
and measured in accordance with SFAS No. 5, “Accounting for
Contingencies”. FSP EITF 00-19-2 also requires additional disclosure
regarding the nature of any registration payment arrangements, alternative
settlement methods, the maximum potential amount of consideration and the
current carrying amount of the liability, if any. The guidance in
FSP EITF 00-19-2 amends FASB Statements No. 133, “Accounting for
Derivative Instruments and Hedging Activities”, and No. 150, “Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity”, and FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of
Others”, to include scope exceptions for registration payment
arrangements.
FSP EITF 00-19-2
is effective immediately for registration payment arrangements and the financial
instruments subject to those arrangements that are entered into or modified
subsequent to the issuance date of this FSP, or for financial statements
issued
for fiscal years beginning after December 15, 2006, and interim periods within
those fiscal years, for registration payment arrangements entered into prior
to
the issuance date of this FSP. The Company is evaluating the impact of this
pronouncement on the Company’s consolidated financial position, results of
operations and cash flows.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
3 - PROPERTY AND EQUIPMENT
Property
and equipment consists of the following:
|
|
At
April 30,
2007
|
|
Leasehold
improvements
|
|
$
|
112,032
|
|
Furniture
and fixtures
|
|
|
19,554
|
|
Office
equipment
|
|
|
49,820
|
|
|
|
|
181,406
|
|
Accumulated
depreciation and amortization
|
|
|
(14,493
|
)
|
Total
|
|
$
|
166,913
|
|
For
the
three months and six months ended April 30, 2007, depreciation and amortization
expense was $5,636 and $9,438, respectively. For the three months and six
months
ended April 30, 2006, depreciation and amortization expense was $620 and
$1,239,
respectively.
NOTE
4 - TECHNOLOGY LICENSES AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS
|
|
At
April 30,
2007
|
|
Technology
licenses
|
|
$
|
5,751,000
|
|
Purchased
technology
|
|
|
228,000
|
|
Capitalized
software development cost
|
|
|
1,604,833
|
|
|
|
|
7,583,833
|
|
Accumulated
amortization
|
|
|
(1,307,692
|
)
|
Total
|
|
$
|
6,276,141
|
|
As
of
April 30, 2007, the weighted average useful life of the Company’s capitalized
software was approximately 6.3 years. The Company commenced amortization of
technology licenses and capitalized software development costs during December
2005 when the Company made available to the market the Cupria Cu5001
semiconductor and recorded amortization expense of $270,363 and $530,666
during
the three months and six months ended April 30, 2007, respectively, and $212,536
and $315,232 during the three months and six months ended April 30, 2006,
respectively.
No
assurance can be given that products the Company releases based upon the
licensed technology and capitalized software costs will receive market
acceptance. If the Company determines in the future that the capitalized
costs
are not recoverable, the carrying amount of the technology license would
be
reduced, and such reduction could be material.
NOTE
5 - FILM IN DISTRIBUTION
The
Company recognized no revenues during the three months and six months ended
April 30, 2007. The Company recognized revenues of $18,698 and $58,874 for
the
three months and six months ended April 30, 2006, respectively.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
6 - DEFERRED FINANCING COSTS
As
of
April 30, 2007, deferred financing costs consists of costs incurred and warrants
issued in connection with the sale of $6,000,000 of 2006 Debentures, $3,500,000
of 2005 Debentures, $1,350,000 of 7% convertible debentures, and promissory
notes:
Deferred
financing costs
|
|
$
|
3,575,818
|
|
Less:
accumulated amortization
|
|
|
(3,432,842
|
)
|
|
|
|
|
|
Deferred
financing costs, net
|
|
$
|
142,976
|
|
Costs
incurred in connection with debt financings are capitalized as deferred
financing costs and amortized over the term of the related debt. If any or
all
of the related debt is converted or repaid prior to its maturity date, a
pro-rata share of the related deferred financing costs are written off and
recorded as amortization expense in the period of the conversion or repayment
in
the consolidated statement of operations. For the three months and six months
ended April 30, 2007, amortization of deferred financing costs was $41,161
and
$1,165,847, respectively. For the three months and six months ended April
30,
2006, amortization of deferred financing costs was $324,852 and $568,819,
respectively.
NOTE
7 - CONVERTIBLE NOTES PAYABLE
The
Company entered into several convertible promissory note agreements with
various
trusts and individuals to fund the operations of the Company. The Company
agreed
to pay the principal and an additional amount equal to 50% of the principal
on
all notes in (1) below. Interest of $236,967 related to these convertible
promissory notes and $72,000 related to a convertible promissory note that
was
previously repaid, for an aggregate of $308,967, has been accrued and is
recorded in accounts payable and accrued expenses as of April 30,
2007.
The
outstanding convertible notes are summarized in the table below:
|
|
|
|
Notes
payable (nine notes) (1)
|
|
$
|
468,000
|
|
Notes
payable, 9% interest, related party (2)
|
|
|
10,000
|
|
|
|
|
|
|
Total
|
|
$
|
478,000
|
|
(1) The
notes
were issued during the period from March 2002 through July 2003, and are
due
only when receipts received by the Company from its Top Secret Productions,
LLC
joint venture exceed $2,250,000. The notes and any accrued and unpaid interest
may be converted at any time, in whole or in part, into shares of common
stock
at conversion prices per share ranging from $0.33 to $1.00.
(2) The
note
was issued in July 2003, in the amount of $10,000, and due only when receipts
received by the Company from its Top Secret Productions, LLC joint venture
exceed $750,000. The note and any accrued and unpaid interest may be converted
at any time, in whole or in part, into shares of common stock at a conversion
price per share of $0.60.
For
all
the above convertible notes, the fair values of the conversion options as
of
April 30, 2007 were nominal due to the conversion price being substantially
out-of-the money.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
8 - CONVERTIBLE DEBENTURES
2006
Debentures
On
March
10, 2006, the Company raised gross proceeds of $6.0 million from a private
placement to 17 institutional and individual investors (the “Investors”) of its
two-year 7% Senior Secured Convertible Debentures (the “2006
Debentures”).
In
connection with the issuance of the 2006 Debentures, the Company issued to
the
Investors warrants to purchase 70,955,548 shares of the Company’s common stock
at an exercise price of $0.15 per share valued at $9,036,727 on the issuance
date (subject to adjustments for stock splits, stock dividends,
recapitalizations, mergers, spin-offs, and certain other transactions). The
warrants are exercisable until the last day of the month in which the third
anniversary of the effective date of the registration statement registering
the
shares underlying the warrants occurs (August 31, 2009).
The
2006
Debentures are convertible into shares of common stock at a conversion price
for
any such conversion equal to the lower of (x) 70% of the volume weighted
average
price (“VWAP”) of the common stock for the 20 days ending on the trading day
immediately preceding the conversion date or (y) if the Company enters into
certain financing transactions, the lowest purchase price or conversion price
applicable to that transaction. The conversion price is subject to
adjustment.
Interest
on the 2006 Debentures accrues at the rate of 7% per annum, payable upon
conversion, or semi-annually (June 30 and December 31 of each year) or upon
maturity, whichever occurs first, and will continue to accrue until the 2006
Debentures are fully converted and/or paid in full. Interest is payable,
at the
option of the Company, either (i) in cash, or (ii) in shares of common stock
at
the then applicable conversion price.
To
secure
the Company’s obligations under the 2006 Debentures, the Company has granted a
security interest in substantially all of its assets, including without
limitation, its intellectual property, in favor of the Investors. The security
interest terminates upon the earlier of (i) the date on which less than
one-fourth of the original principal amount of the 2006 Debentures issued
on the
Closing Date are outstanding or (ii) payment or satisfaction of all of the
Company’s obligations under the related securities purchase agreement. During
the three months ended January 31, 2007, condition (i) was met and therefore
the
security interest terminated.
The
Company agreed to include the shares of common stock issuable upon conversion
of
the 2006 Debentures and exercise of the related warrants issued to investors
and
the placement agent in a registration statement filed by the Company with
the
Securities and Exchange Commission (the “SEC”). Since the registration statement
was not declared effective by the SEC by June 23, 2006, the Company is obligated
to pay liquidated damages to the holders of the 2006 Debentures. A registration
statement covering the common stock issuable upon conversion of the 2006
Debentures and the related warrants issued to investors and the placement
agent
was declared effective by the SEC on August 16, 2006. These liquidated damages
aggregated $212,000. At their option, the holders of the 2006 Debentures
are
entitled to be paid such amount in cash or shares of restricted common stock
at
a per share rate equal to the effective conversion price of the 2006 Debentures
at the time the liquidated damages became due. During the six months ended
April
30, 2007, 464,535 shares of common stock valued at $68,547 were issued as
payment for liquidated damages. There were no such payments made during the
three months ended April 30, 2007. Accrued liquidated damages as of April
30,
2007 was $143,453.
In
connection with the placement of the 2006 Debentures, a placement agent received
a placement agent fee equal to (i) 10% of the aggregate purchase price (i.e.,
$600,000), (ii) 10% of the proceeds realized in the future from exercise
of
warrants issued to the Investors, (iii) warrants to purchase an aggregate
of
7,095,556 shares of common stock having an initial exercise price equal to
$0.1693 per share valued at $888,779 on the issuance date, and (iv) warrants
to
purchase an aggregate of 7,095,556 shares of common stock having an initial
exercise price equal to $0.15 per share valued at $903,673 on the issuance
date.
The exercise price of the placement agent warrants is subject to adjustments
for
stock splits, stock dividends, recapitalizations, mergers, spin-offs, and
certain other transactions.
The
aggregate fair value of the placement agent’s warrants of $1,792,452 on the
issuance date was recorded as a deferred financing cost and is being charged
to
interest expense over the term of the 2006 Debentures.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
8 - CONVERTIBLE DEBENTURES (CONTINUED)
2006
Debentures
(Continued)
The
gross
proceeds of $6,000,000 was recorded as a liability net of a debt discount
of
$6,000,000 consisting of an allocation of the fair values attributed to the
Investors’ warrants and to the embedded conversion feature in accordance with
EITF Issue No. 00-19. The debt discount consisted of a $3,428,571 value
related to the Investors’ warrants and a value attributed to the embedded
conversion feature of $2,571,429. The debt discount was first allocated to
the
embedded conversion feature based on its fair value. After reducing the gross
proceeds by the value allocated to the embedded conversion feature, the
remaining unallocated debt discount of $3,428,571 was allocated to the
Investors’ warrants. The excess of the fair value of the Investors’ warrants
above the debt discount allocated to the Investors’ warrants was $5,608,156 and
was charged to interest expense during the three months ended April 30,
2006.
In
accordance with SFAS No. 133 and EITF Issue No. 00-19, due to the possibility
that an indeterminate number of shares could be issued upon conversion of
the
2006 Debentures, the Company separately values and accounts for the embedded
conversion feature related to the 2006 Debentures, the Investors’ warrants and
the placement agent’s warrants.
As
of
April 30, 2007, the conversion option liability of $2,571,429 had been reduced
to $283,714 as a result of conversions of the 2006 Debentures. During the
six
months ended April 30, 2007, $1,684,715 was recorded as a reclassification
to
stockholders’ equity. Since the issuance of the 2006 Debentures, an aggregate of
$2,287,715 has been recorded as a reclassification to stockholders’ equity.
The
change in fair value of the derivative liabilities of $1,278,406 and $136,903
was recognized as part of other income during the three months and six months
ended April 30, 2007, respectively. The change in fair value of the derivative
liabilities of $2,648,668 was recognized during the three months and six
months
ended April 30, 2006.
During
the three months ended January 31, 2007, $3,931,000 of principal amount of
2006
Debentures plus accrued interest of $136,911 were converted into 56,376,123
shares of common stock. During the three months ended April 30, 2007, no
principal or accrued interest was converted into shares of common stock.
During
the three months ended April 30, 2006, no principal or accrued interest was
converted into shares of common stock.
Included
in interest expense for the three months and six months ended April 30, 2007
is
$80,599 and $2,831,187, respectively, related to the amortization of the
debt
discount on these debentures. Included in interest expense for the three
months
and six months ended April 30, 2006 is $418,605 and $418,605, respectively,
related to the amortization of the debt discount on these
debentures.
The
2006
Debentures are summarized below as of April 30, 2007:
|
|
Outstanding
Principal
Amount
|
|
Unamortized
Debt
Discount
|
|
Net
Carrying
Value
|
|
Current
|
|
$
|
662,000
|
|
$
|
285,267
|
|
$
|
376,733
|
|
2005
Debentures
On
May
26, 2005, the Company completed a private placement to certain individual
and
institutional investors of $3,500,000 in principal amount of its three-year
7%
Senior Secured Convertible Debentures (the “2005 Debentures”). All principal is
due and payable on May 26, 2008. The 2005 Debentures are convertible into
shares
of common stock at a conversion price equal to the lower of (x) 70% of the
5 day
volume weighted average price of the Company’s common stock immediately prior to
conversion or (y) if the Company entered into certain financing transactions
subsequent to the closing date, the lowest purchase price or conversion price
applicable to that transaction.
Interest
on the 2005 Debentures accrues at the rate of 7% per annum and is payable
on a
bi-annual basis, commencing December 31, 2005, or on conversion and may be
paid,
at the option of the Company, either in cash or in shares of common stock.
The
Company may prepay the amounts outstanding on the 2005 Debentures by giving
advance notice and paying an amount equal to 120% of the sum of (x) the
principal being prepaid plus (y) the accrued interest thereon.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
8 - CONVERTIBLE DEBENTURES (CONTINUED)
2005
Debentures
(Continued)
In
connection with the issuance of the 2005 Debentures, the Company issued to
the
purchasers thereof warrants (the “Investor Warrants”) to purchase 33,936,650
shares of common stock valued at $2,000,000 on the issuance date, with warrants
for 11,312,220 shares being exercisable through the last day of the month
in
which the first anniversary of the effective date of the Registration Statement
occurs (August 31, 2006) at a per share exercise price of $0.1547 and warrants
for 22,624,430 shares being exercisable through the last day of the month
in
which the third anniversary of the effective date of the Registration Statement
occurs (August 31, 2008) at a per share exercise price of $0.3094.
In
connection with the issuance of the 2005 Debentures, the Company also issued
to
a placement agent warrants to purchase up to 5,656,108 shares of Common Stock
(the “Compensation Warrants”) valued at $319,066 on the issuance date. This
amount was recorded as a deferred financing cost and is being charged to
interest expense over the term of the 2005 Debentures. All of the Compensation
Warrants were exercised in February 2006 in connection with the Warrant
Amendment discussed below.
On
February 21, 2006, the Company and certain holders of Investor and Compensation
Warrants entered into an amendment (the “Warrant Amendment”) to the terms of
their warrants. Pursuant to the Warrant Amendment, the Company and certain
holders of the Investor and Compensation Warrants agreed to temporarily reduce
the exercise price of the Investor and Compensation Warrants to $0.05 per
share
from February 21, 2006 until March 10, 2006 (the “New Price Exercise Period”).
The warrant holders that are parties to the Warrant Amendment were permitted,
but not required to, exercise all or any portion of their Investor and
Compensation Warrants at a per share price of $0.05 at any time during the
New
Price Exercise Period, but could not do so by means of a cashless exercise.
This
reduction in the exercise price of the Investor and Compensation Warrants
expired on March 10, 2006. During the New Price Exercise Period, holders
of the
Investor and Compensation Warrants exercised warrants to purchase 11,370,624
shares of common stock at the reduced exercise price of $0.05 per share,
resulting in gross proceeds to the Company of $568,531. Except as expressly
provided in the Warrant Amendment, the terms and conditions of the Investor
and
Compensation Warrants and any related registration rights agreement shall
be
unchanged and remain in full force and effect. In addition, the warrant holders
agreed to waive any claims arising out of or relating to the failure, if
any, to
have available registered Warrant Shares, as defined in the Investor and
Compensation Warrants, prior to June 23, 2006.
The
Company agreed to include the shares of common stock issuable upon the exercise
of each Investor or Compensation Warrant (whether or not pursuant to the
terms
of the Warrant Amendment) in a registration statement to be filed by the
Company
with the SEC. The common stock underlying the Investor and Compensation Warrants
were included in the registration statement declared effective by the SEC
on
August 16, 2006.
Holders
of the Investor Warrants are entitled to exercise those warrants on a cashless
basis following the first anniversary of issuance if the Registration Statement
is not in effect at the time of exercise.
The
gross
proceeds of $3,500,000 was recorded net of a debt discount of $3,500,000.
The
debt discount consisted of a $2,000,000 value related to the Investor Warrants
and a $1,500,000 value related to the embedded conversion feature in accordance
with SFAS No. 133 and EITF Issue No. 00-19. Due to the possibility that an
indeterminate number of shares could be issued upon conversion of the 2005
Debentures, the Company separately values and accounts for the embedded
conversion feature related to the 2005 Debentures and the Investor Warrants
as
derivative liabilities. Accordingly, these derivative liabilities are measured
at fair value with changes in fair value reported in earnings as long as
they
remain classified as liabilities.
As
of
April 30, 2007, the conversion option liability of $1,500,000 had been reduced
to $1,834 as a result of conversions of the 2005 Debentures. During the six
months ended April 30, 2007, $551 was recorded as a reclassification to
stockholders’ equity. Since the issuance of the 2005 Debentures, an aggregate of
$1,498,166 has been recorded as a reclassification to stockholders’ equity.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
8 - CONVERTIBLE DEBENTURES (CONTINUED)
2005
Debentures
(Continued)
A
gain on
the change in fair value of the derivative liabilities of $316,516 was
recognized during the three months ended April 30, 2007 and a loss on the
change
in fair value of the derivative liabilities of $3,109,068 was recognized
during
the three months ended April 30, 2006. A gain on the change in fair value
of the
derivative liabilities of $106,419 was recognized during the six months ended
April 30, 2007 and a loss on the change in fair value of the derivative
liabilities of $3,133,206 was recognized during the six months ended April
30,
2006.
During
the three months ended January 31, 2007, $1,284 of principal amount of 2005
Debentures plus accrued interest of $37 were converted into 18,321 shares
of
common stock. During the three months ended April 30, 2007, no principal
or
accrued interest was converted into shares of common stock.
During
the three months ended January 31, 2006, $1,310,724 of principal amount of
2005
Debentures plus accrued interest of $69,777 were converted into 81,262,199
shares of common stock. During the three months ended April 30, 2006, 464,423
of
principal amount of the 2005 Debentures plus accrued interest of $2,401 were
converted into 22,908,266 shares of common stock.
Included
in interest expense for the three months and six months ended April 30, 2007
is
$348 and $1,375, respectively, related to the amortization of the debt discount
related to these debentures.
Included
in interest expense for the three months and six months ended April 30, 2006
is
$361,783 and $1,525,943, respectively, related to the amortization of the
debt
discount related to these debentures.
The
2005
Debentures are summarized below as of April 30, 2007:
|
|
Outstanding
Principal
Amount
|
|
Unamortized
Debt
Discount
|
|
Net
Carrying
Value
|
|
Long-term
portion
|
|
$
|
4,280
|
|
$
|
1,540
|
|
$
|
2,740
|
|
7%
Debentures
In
December 2003, April 2004 and May 2004, the Company completed a private
placement to certain private and institutional investors of $1,350,000 in
principal amount of its three-year 7% Convertible Debentures (the “7%
Debentures”).
Under
the
agreements with the purchasers of the 7% Debentures issued in December 2003,
the
Company is obligated to pay to the Debenture holders liquidated damages
associated with the late filing of the Registration Statement and the missed
Registration Statement required effective date of March 30, 2004. Liquidated
damages are equal to (x) 2% of the principal amount of all the Debentures
during
the first 30-day period following late filing or effectiveness and (y) 3%
of the
principal amount of all Debentures for each subsequent 30-day period (or
part
thereof). These liquidated damages aggregated to $160,000. At their option,
the
Debenture holders are entitled to be paid such amount in cash or shares of
Common Stock at a per share rate equal to the effective conversion price
of the
Debentures, which is currently $0.15. Accrued liquidated damages as of April
30,
2007 and 2006 was $37,550.
During
the three months and six months ended April 30, 2007 and 2006, no principal
or
accrued interest was converted into shares of common stock.
Included
in interest expense for the three months and six months ended April 30, 2007
is
$733 and $1,491, respectively, related to the amortization of the debt discount
related to these debentures.
Included
in interest expense for the three months and six months ended April 30, 2006
is
$10,151 and $23,481, respectively, related to the amortization of the debt
discount related to these debentures.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
8 - CONVERTIBLE DEBENTURES (CONTINUED)
7%
Debentures
(Continued)
The
7%
Debentures are summarized below as of April 30, 2007:
|
|
Outstanding
Principal
Amount
|
|
Unamortized
Debt
Discount
|
|
Net
Carrying
Value
|
|
Current
|
|
$
|
75,000
|
|
$
|
57
|
|
$
|
74,943
|
|
The
remaining 7% Debentures outstanding at April 30, 2007, originally issued
in May
2004, were due and payable in May 2007. As of this date, the 7% Debentures
remain outstanding.
NOTE
9 - NOTES PAYABLE
In
April
2007, the Company entered into a loan agreement with a third party pursuant
to
which the Company borrowed $300,000 from the lender. An amount equal to 108%
of
the principal amount ($324,000) of the loans is due and payable on the earlier
of July 31, 2007 or the date the Company effects a financing transaction
or
series of transactions resulting in gross proceeds to the Company of at least
$2,000,000. The difference between the gross proceeds and amount due at maturity
is shown as a debt discount that is amortized as interest expense over the
life
of the loan. The Company issued to the lender warrants to purchase 3,333,333
shares of common stock at an exercise price of $0.10 per share. The fair
value
of the warrants of $226,567 at issue date is shown as a debt discount that
is
amortized as interest expense over the life of the loan. A provision in the
agreement required repricing of the warrants to the same price as any subsequent
stock sales. This event occurred on April 30, 2007 (see Note 10) and the
exercise price was lowered to $0.05 per share. The reduction of the warrant
exercise price resulted in revaluing the warrants to $143,311. To secure
the
Company’s obligations under the loan agreement, the Company granted a security
interest in substantially all of its assets, including without limitation,
its
intellectual property. The security interest terminates upon payment or
satisfaction of all of the Company’s obligations under the loan agreement. The
Company received net proceeds of $265,970 at the issue date following the
payment of due diligence fees and transaction related fees and expenses.
These
transaction related fees were recorded as deferred financing costs. For the
three months ended April 30, 2007, amortization of debt discount on this
loan
was $59,457.
In
February 2006, the Company issued 5,304,253 shares of restricted common stock
in
exchange for the return and cancellation of the outstanding principal of
$256,886 and interest of $114,412 on five, unsecured individual notes payable,
each with identical terms and bearing 6% interest. As the conversion rate
of
$0.07 was below the closing price of the common stock on the conversion date,
a
loss of $196,257 was recognized during the three months ended April 30,
2006.
In
February 2006, the Company issued 6,760,241 shares of restricted common stock
in
exchange for the return and cancellation of the outstanding principal of
$443,251 and interest of $29,766 on this note. As the conversion rate of
$0.07
was below the closing price of the common stock on the conversion date, a
loss
of $250,129 was recognized during the three months ended April 30,
2006.
NOTE
10 - STOCKHOLDERS’ DEFICIENCY
Common
Stock
During
the three months ended January 31, 2007, the Company:
· |
issued
56,394,444 shares of common stock upon conversion of convertible
debentures with a principal amount of $3,932,284 and accrued interest
of
$136,948;
|
· |
issued
11,736,991 shares of restricted common stock in exchange for services
valued at $1,402,000;
|
· |
issued
464,535 shares of restricted common stock to 2006 Debenture holders
in
satisfaction of $68,547 in liquidated damages;
and
|
· |
issued
600,000 shares of common stock upon exercise of stock options in
satisfaction of accrued expenses of
$19,140.
|
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
10 - STOCKHOLDERS’ DEFICIENCY (CONTINUED)
Common
Stock
(Continued)
During
the three months ended April 30, 2007, the Company:
· |
issued
6,000,000 shares of restricted common stock for $300,000 cash;
and
|
· |
issued
317,460 shares of restricted common stock in exchange for services
valued
at $29,524.
|
Stock
Option Plans
In
November 2006, the 2006 Stock Incentive Plan (the “2006 Plan”) was adopted. The
2006 Plan authorizes the issuance of up to 30,000,000 incentive stock options,
non-qualified stock options or stock awards to directors, officers, employees
and certain consultants to the Company. During the three months ended January
31, 2007, the Company granted a total of 4,350,000 options under the 2006
Plan
to a total of five directors, officers and employees of the Company. During
the
three months ended April 30, 2007, the Company granted no options under the
2006
Plan.
Options
Granted
During
the three months ended January 31, 2007, the following options were
granted:
· |
Options
to purchase 100,000 shares of common stock were granted to an employee
under the 2006 Plan. These options were valued at $11,344 and have
a ten
year term, an exercise price of $0.12 per share, and vest over
a period of
approximately three years through January 2010;
and
|
· |
Options
to purchase 4,250,000 shares of common stock were granted to one
director
and three executive employees under the 2006 Plan. These options
were
valued at $386,427 and have a ten year term, an exercise price
of $0.096
per share, and vest over a period of approximately three years
through
November 2009.
|
During
the three months ended April 30, 2007, no options were granted.
The
estimated weighted-average fair value of stock options granted during the
six
months ended April 30, 2007 and 2006 was $0.09 and $0.03 per share,
respectively, using the Black-Scholes model with the following
assumptions:
|
Three
Months Ended April 30,
|
|
Six
Months Ended April 30,
|
|
2007
|
2006
|
|
2007
|
2006
|
Expected
dividends
|
N/A
|
None
|
|
None
|
None
|
|
|
|
|
|
|
Expected
volatility
|
N/A
|
144-158.1%
|
|
116%
|
144-158.1%
|
|
|
|
|
|
|
Risk-free
interest rate
|
N/A
|
4.34-4.58%
|
|
4.63-4.65%
|
4.34-4.58%
|
|
|
|
|
|
|
Expected
life
|
N/A
|
10
years
|
|
10
years
|
10
years
|
Options
Exercised
During
the three months ended January 31, 2007, options to purchase 600,000 shares
of
common stock were exercised. Upon the exercise of these options, the Company
reclassified the fair value of $71,521 from derivative liabilities to
stockholders’ equity. During the three months ended January 31, 2007, a loss of
$16,441, resulting from the change in fair value of these options, was
recognized. During the three months ended April 30, 2007, no options were
exercised.
Options
Cancelled
During
the three months ended January 31, 2007, no options were cancelled. During
the
three months ended April 30, 2007, 300,000 options granted to an employee
who
terminated on January 31, 2007, were cancelled under the terms of the
plan.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
10 - STOCKHOLDERS’ DEFICIENCY (CONTINUED)
Warrants
During
the three months ended April 30, 2007, 3,333,333 warrants to purchase common
stock were issued in connection with the April 2007 note payable (see Note
9).
These warrants are exercisable at a price of $0.05 per share beginning 65
days
from the issuance date (June 6, 2007) and expire April 2, 2012.
Net
Loss Per Share
Securities
that could potentially dilute basic earnings per share (EPS), in the future,
that were not included in the computation of diluted EPS because to do so
would
have been anti-dilutive for the periods presented, consist of the
following:
|
|
April
30,
2007
|
|
April
30,
2006
|
|
Warrants
to purchase common stock
|
|
|
117,870,937
|
|
|
131,888,793
|
|
2006
Debentures and accrued interest (1)
|
|
|
9,822,118
|
|
|
69,021,246
|
|
Options
to purchase common stock
|
|
|
38,893,750
|
|
|
29,393,750
|
|
Convertible
notes payable and accrued interest
|
|
|
1,508,927
|
|
|
1,757,414
|
|
7%
Debentures and accrued interest
|
|
|
621,548
|
|
|
975,204
|
|
2005
Debentures and accrued interest (2)
|
|
|
120,685
|
|
|
500,247
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
168,837,965
|
|
|
233,536,654
|
|
(1) Based
on
a twenty day volume weighted average common stock price discounted by 30%
as of
April 30, 2007 and 2006 of $0.06895 and $0.08778, respectively.
(2) Based
on
a five day volume weighted average common stock price discounted by 30% as
of
April 30, 2007 and 2006 of $0.06678 and $0.09002, respectively.
NOTE
11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
HelloSoft
Agreements
The
Company and HelloSoft, Inc. (“HelloSoft”) entered into a Services Agreement
dated as of March 31, 2004 (the “Original Agreement”) pursuant to which
HelloSoft provides development services relating to the Company’s semiconductor
technologies. The Original Agreement provides that, upon the Company’s request
from time to time, HelloSoft is to provide services to be specified pursuant
to
mutually agreed upon terms. HelloSoft has assigned to the Company the rights
to
any improvements, developments, discoveries or other inventions that may
be
generated by HelloSoft in its performance of the services to be provided
under
the Original Agreement and its amendments.
As
of
January 31, 2007, HelloSoft had completed all committed work under the Original
Agreement and its amendments, and been paid in full. As of January 31, 2007,
the
Company had paid an aggregate of approximately $998,000 in cash and has issued
8,047,618 shares of common stock valued at $820,042 to HelloSoft for the
services rendered under the Original Agreement and its amendments. Of this
amount, $62,500 in cash that had been accrued at October 31, 2005 was paid
during the three months ended January 31, 2006 and $225,000 in cash was paid
during the three months ended January 31, 2007. The Company issued another
317,460 shares of unregistered common stock valued at $29,524, on March 23,
2007
to satisfy its final obligation under the contract.
On
February 6, 2006, the Company entered into a technology license agreement
with
HelloSoft. Under the agreement, the Company has obtained a license to include
HelloSoft’s integrated VoIP software suite in the Company’s Cupria™ family of
semiconductors. In exchange for this license, the Company paid HelloSoft
a
license fee and has agreed to pay certain royalties based on its sales of
products including the licensed technology.
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
(CONTINUED)
eSilicon
Agreement
On
December 12, 2006, the Company entered into a three-year Master ASIC Services
Agreement with eSilicon Corporation (“eSilicon”) (the “MSA”), pursuant to which
eSilicon agreed to provide physical design and manufacturing services to
the
Company in exchange for cash and unregistered shares of the Company’s common
stock. In connection with the MSA and related orders by the Company and pursuant
to a Stock Purchase Agreement between the Company and eSilicon, the Company
issued to eSilicon 3,736,991 shares of restricted common stock for $395,000
of
non-recurring engineering services to be provided by eSilicon related to
the
application-specific standard part (“ASSP”) version of the Cupria™ Cu5001. The
common stock issued to eSilicon was valued at the market price at the time
of
issuance and the $395,000 was recorded as research and development expense.
Additional cash payments will be made by the Company to eSilicon for other
services as such services are performed.
Concentration
of Credit Risk
The
Company maintains cash balances in one financial institution. The balance
is
insured by the Federal Deposit Insurance Corporation up to $100,000 per
institution. From time to time, the Company’s balances may exceed these limits.
As of April 30, 2007, uninsured balances were $103,790. The Company
believes it is not exposed to any significant credit risk for cash.
NOTE
12 - SEGMENT INFORMATION
Summarized
financial information concerning the Company’s reportable segments is shown in
the following table:
|
|
Semiconductor
Business
|
|
Entertainment
Business
|
|
Unallocable
|
|
Totals
|
|
For
the Three Months Ended April 30,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales - Domestic
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Net
Sales - Foreign
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Operating
Loss
|
|
$
|
(1,837,948
|
)
|
$
|
(2,440
|
)
|
$
|
-
|
|
$
|
(1,840,388
|
)
|
Depreciation
and amortization
|
|
$
|
270,363
|
|
$
|
-
|
|
$
|
-
|
|
$
|
270,363
|
|
|
|
Semiconductor
Business
|
|
Entertainment
Business
|
|
Unallocable
|
|
Totals
|
|
For
the Three Months Ended April 30,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales - Domestic
|
|
$
|
-
|
|
$
|
698
|
|
$
|
-
|
|
$
|
698
|
|
Net
Sales - Foreign
|
|
$
|
-
|
|
$
|
18,000
|
|
$
|
-
|
|
$
|
18,000
|
|
Operating
(Loss) Income
|
|
$
|
(213,156
|
)
|
$
|
17,397
|
|
$
|
(1,599,636
|
)
|
$
|
(1,795,395
|
)
|
Depreciation
and amortization
|
|
$
|
213,156
|
|
$
|
-
|
|
$
|
-
|
|
$
|
213,156
|
|
RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
12 - SEGMENT INFORMATION (CONTINUED)
|
|
Semiconductor
Business
|
|
Entertainment
Business
|
|
Unallocable
|
|
Totals
|
|
For
the Six Months Ended April
30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales - Domestic
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Net
Sales - Foreign
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Operating
Loss
|
|
$
|
(4,181,147
|
)
|
$
|
(14,434
|
)
|
$
|
-
|
|
$
|
(4,195,581
|
)
|
Depreciation
and amortization
|
|
$
|
540,104
|
|
$
|
-
|
|
$
|
-
|
|
$
|
540,104
|
|
Total
Identifiable Assets
|
|
$
|
6,763,568
|
|
$
|
977
|
|
$
|
293,946
|
|
$
|
7,058,491
|
|
|
|
Semiconductor
Business
|
|
Entertainment
Business
|
|
Unallocable
|
|
Totals
|
|
For
the Six Months Ended April 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales - Domestic
|
|
$
|
-
|
|
$
|
6,932
|
|
$
|
-
|
|
$
|
6,932
|
|
Net
Sales - Foreign
|
|
$
|
-
|
|
$
|
51,942
|
|
$
|
-
|
|
$
|
51,942
|
|
Operating
(Loss) Income
|
|
$
|
(316,471
|
)
|
$
|
53,688
|
|
$
|
(2,487,247
|
)
|
$
|
(2,750,030
|
)
|
Depreciation
and amortization
|
|
$
|
316,471
|
|
$
|
-
|
|
$
|
-
|
|
$
|
316,471
|
|
Total
Identifiable Assets
|
|
$
|
8,041,340
|
|
$
|
-
|
|
$
|
4,061,196
|
|
$
|
12,102,536
|
|
NOTE
13 - SUBSEQUENT EVENTS
Equity
Transactions
In
May
2007:
|
(i) |
2,500,000
unregistered shares of common stock were issued in exchange for
cash of
$125,000;
|
|
(ii) |
30,487
unregistered shares of common stock were issued in satisfaction
of
services valued at $2,500;
|
|
(iii) |
Options
to purchase 100,000 shares of common stock were granted to an employee.
These options were valued at $9,339 and have a ten year term, an
exercise
price of $0.092 per share, and vest over a period of approximately
three
years through June 2010; and
|
|
(iv) |
Options
to purchase 200,000 shares of common stock were granted to a consultant.
These options were valued at $18,678 and have a ten year term,
an exercise
price of $0.092 per share, and vest over a period of approximately
three
years through June 2010.
|
In
June
2007, 1,200,000 unregistered shares of common stock were issued in satisfaction
of services valued at $75,600.
Note
Payable
On
May
24, 2007, the Company entered into a promissory note resulting in gross proceeds
of $400,000. The
Note
is due and payable on August 22, 2007 and bears a 10% interest rate. In the
event the Note is not repaid by the maturity date, or is otherwise in default,
the unpaid portion of the Note will become convertible, in whole or in part,
into shares of the Company's common stock at a conversion price of $0.08
per
share.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
We
urge
you to read the following discussion in conjunction with our condensed
consolidated financial statements and the notes thereto included elsewhere
herein.
CAUTION
REGARDING FORWARD-LOOKING STATEMENTS
Our
prospects are subject to uncertainties and risks. In this Quarterly Report
on
Form 10-QSB, we make forward-looking statements in this Item 2 and elsewhere
that also involve substantial uncertainties and risks. These forward-looking
statements are based upon our current expectations, estimates and projections
about our business and our industry, and reflect our beliefs and assumptions
based upon information available to us at the date of this report. In some
cases, you can identify these statements by words such as “if,” “may,” “might,”
“will, “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” “continue,” and other similar terms. These
forward-looking statements include, among other things, projections of our
future financial performance and our anticipated growth, descriptions of
our
strategies, our product and market development plans, the trends we anticipate
in our business and the markets in which we operate, and the competitive
nature
and anticipated growth of those markets.
We
caution readers that forward-looking statements are predictions based on
our
current expectations about future events. These forward-looking statements
are
not guarantees of future performance and are subject to risks, uncertainties
and
assumptions that are difficult to predict. Our actual results, performance
or
achievements could differ materially from those expressed or implied by the
forward-looking statements as a result of a number of factors, including
but not
limited to the risks and uncertainties discussed in our other filings with
the
SEC. We undertake no obligation to revise or update any forward-looking
statement for any reason.
OVERVIEW
Rim
Semiconductor Company (the “Company,” “we,” “our,” or “us”) is developing
advanced transmission technology products to enable data to be transmitted
across copper telephone wire at speeds and over distances that exceed those
offered by leading DSL technology providers. In September 2005, the Company
changed its name from New Visual Corporation to Rim Semiconductor Company.
Our
common stock trades on the OTC Bulletin Board under the symbol RSMI. Our
corporate headquarters are located at 305 NE 102nd Avenue, Portland, Oregon
97220 and our telephone number is (503) 257-6700.
Our
initial chipset in a planned family of transport processors, the Cupria™ Cu5001
(formerly known as Embarq™ E30) digital signal processor, was first shown to
several prospective customers during the first fiscal quarter of 2006. In
the
third fiscal quarter of 2006, we initiated a technical cooperation program
with
Embarq Corporation of Overland Park, Kansas that will evaluate the potential
application of our integrated circuits in Embarq’s data network. As part of this
program, we and Embarq are working with suppliers to develop prototype network
elements like digital subscriber line access multiplexers and consumer modems
that utilize our chipset. If such prototypes are developed and subsequent
lab
evaluations are deemed successful, Embarq has agreed to conduct a field trial
of
our Cupria™ family of semiconductors and to share its observations from the
trial with its suppliers. As part of our efforts to produce network
infrastructure equipment utilizing the Cu5001 that we believe will be suitable
for use in Embarq’s network, we secured commitments from Extreme Copper, Inc. of
Newbury Park, California and Logic Research of Fukuoka, Japan to incorporate
the
Cu5001 in its next generation digital subscriber line access multiplexers
(DSLAM) and customer premises equipment (CPE).
While
our
technology is currently available for evaluation and testing in field
programmable gate array (“FPGA”) form, we do not believe that we will realize
substantial revenues until our technologies are mass-produced in
application-specific standard part (“ASSP”) form. We estimate that it will cost
approximately $500,000 of additional engineering and fabrication expense
in
order to produce a mass market ASSP version. Subject to raising the needed
capital, we estimate that we will complete them during the third fiscal quarter
of 2007. To date, we have not recorded any revenues from the sale of products
based on our technology. During the quarter ended April 30, 2007, we received
our first purchase order for Cupria™ products. This order, for $114,000 is
expected to be fulfilled during our third fiscal quarter. However, because
it is
subject to cancellation by the purchaser without penalty, there can be no
assurance that this order will result in a completed sale.
We
estimate that we will need an additional $1 million to accelerate our sales,
marketing, manufacturing and customer service activities. In addition, we
will
need to raise approximately $735,000 to repay two short-term loans that will
become due and payable in July and August 2007. We presently do not have
the
capital resources to undertake any of these steps, or to repay these debts,
although we do have a commitment from an institutional investor to purchase
$6
million of 7% Senior Secured Convertible Debentures upon our request. The
complexity of our technology could result in unforeseen delays or expenses
in
the commercialization process, and there can be no assurance that we will
be
able to successfully commercialize our semiconductor technology.
We
expect
that system-level products that use our technology will have a significant
advantage over existing system-level products that use existing broadband
technologies, such as digital subscriber line (DSL), because such products
will
transmit data faster, and over longer distances. We expect products using
our
technology will offer numerous advantages to the network operators that deploy
them, including the ability to support new services, the ability to offer
existing and new services to previously unreachable locations in their network,
reduction in total cost of ownership, security, and
reliability.
Research
and Development
Research
and development expenses relate to the design and development of advanced
transmission technology products. Prior to establishing technological
feasibility, software development costs are expensed to research and development
costs and to cost of sales subsequent to confirmation of technological
feasibility. Internal development costs are capitalized to software development
costs once technological feasibility is established. Technological feasibility
is evaluated on a product-by-product basis. Research and development expenses
generally consist of salaries, related expenses for engineering personnel
and
third-party development costs incurred.
We
outsourced all of the development activities with respect to our products
to
independent third party developers until April 2006, when we hired our first
engineer. During the fourth fiscal quarter of 2006, we hired a Vice President
to
oversee the development and marketing of our semiconductors as well as three
other engineering employees to supervise the continued development of our
products. During the three months ended April 30, 2007 and 2006, we expended
$161,946 and $52,556, respectively, for research and development of our
semiconductor technology. During the six months ended April 30, 2007 and
2006,
we expended $809,620 and $137,600, respectively, for research and development
of
our semiconductor technology.
Technology
Licenses
We
have
entered into two technology license agreements that may impact our future
results of operations. Royalty payments, if any, under each license would
be
reflected in our consolidated statements of operations as a component of
cost of
sales.
In
April
2002, we entered into a development and license agreement with Adaptive
Networks, Inc. (“Adaptive”), to acquire a worldwide, perpetual license to
Adaptive’s technology, intellectual property and patent portfolio. The licensed
technology provides the core technology for our semiconductor products. We
have
also jointly developed technology with Adaptive that enhances the licensed
technology.
In
consideration of the development services provided and the licenses granted
to
us by Adaptive, we paid Adaptive an aggregate of $5,751,000 between 2002
and
2004 consisting of cash and our assumption of certain Adaptive liabilities.
In
addition to the above payments, Adaptive is entitled to a percentage of any
net
sales of products sold by us and any license revenue we receive from the
licensed and co-owned technologies less the first $5,000,000 that would
otherwise be payable to them under this royalty arrangement.
In
February 2006, we obtained a license to include HelloSoft, Inc.’s integrated
VoIP software suite in the Cupria™
family
of transport processors. We believe the inclusion of VoIP features in our
products will eliminate VoIP dedicated components currently needed in modems
and
thereby lower their production costs by more than 20%. In consideration of
this
license, we have paid HelloSoft a license fee and will pay certain royalties
based on our sale of products, including the licensed
technology.
CRITICAL
ACCOUNTING POLICIES
The
preparation of our condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires us to make estimates and judgments that affect the reported amounts
of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. Our estimates are based on historical experience,
other
information that is currently available to us and various other assumptions
that
we believe to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions and the variances
could be material.
Our
critical accounting policies are those that affect our condensed consolidated
financial statements materially and involve difficult, subjective or complex
judgments by management. We have identified the following critical accounting
policies that affect the more significant judgments and estimates used in
the
preparation of our condensed consolidated financial statements.
Derivative
Financial Instruments
In
connection with the issuance of certain convertible debentures, the terms
of the
debentures included an embedded conversion feature that provided for a
conversion of the debentures into shares of our common stock at a rate that
was
determined to be variable. We determined that the conversion feature was
an
embedded derivative instrument and that the conversion option was an embedded
put option pursuant to Statement of Financial Accounting Standards (“SFAS”) No.
133, “Accounting for Derivative Instruments and Hedging Activities,” as amended,
and Emerging Issues Task Force (“EITF”) Issue No. 00-19, “Accounting for
Derivative Financial Instruments Indexed To, and Potentially Settled In,
a
Company's Own Stock.”
The
accounting treatment of derivative financial instruments requires that we
record
the debentures and related warrants at their fair values as of the inception
date of the convertible debenture agreements and at fair value as of each
subsequent balance sheet date. In addition, under the provisions of EITF
Issue No. 00-19, as a result of entering into the convertible debenture
agreements, we were required to classify all other non-employee warrants
and
options as derivative liabilities and record them at their fair values at
each
balance sheet date. Any change in fair value was recorded as non-operating,
non-cash income or expense at each balance sheet date. If the fair value
of the
derivatives was higher at the subsequent balance sheet date, we recorded
a
non-operating, non-cash charge. If the fair value of the derivatives was
lower at the subsequent balance sheet date, we recorded non-operating, non-cash
income. We reassess the classification at each balance sheet date. If the
classification required under EITF Issue No. 00-19 changes as a result of
events
during the period, the contract is reclassified as of the date of the event
that
caused the reclassification.
Stock-Based
Compensation
We
report
stock based compensation under accounting guidance provided by Statement
of
Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”
(“SFAS 123(R)”), which requires the measurement and recognition of compensation
expense for all share-based payment awards made to employees and directors,
including stock options, based on estimated fair values.
SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in our consolidated statement
of
operations. Prior to the adoption of SFAS 123(R), we accounted for stock-based
awards to employees and directors using the intrinsic value method in accordance
with APB 25 as allowed under Statement of Financial Accounting Standards
No.
123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the intrinsic
value method, no stock-based compensation expense for employee stock options
had
been recognized in our consolidated statement of operations because the exercise
price of our stock options granted to employees and directors equaled the
fair
market value of the underlying stock at the date of grant.
SFAS
123(R) also requires that the cash retained as a result of the tax deductibility
of the increase in the value of share-based arrangements be presented as
a
component of cash flows from financing activities in the consolidated statement
of cash flows. Prior to the adoption of SFAS 123(R), such amounts were required
to be presented as a component of cash flows from operating activities. Due
to
our tax net operating loss position, we do not realize cash savings as a
result
of the tax deduction for stock-based compensation. Accordingly, the adoption
SFAS 123(R) had no effect on our cash flows from operating or financing
activities for the six months ended April 30, 2007.
We
have
continued to attribute the value of stock-based compensation to expense on
the
straight-line single option method.
Stock-based
compensation expense recognized under SFAS 123(R) related to employee stock
options was $117,183 and $227,948 for the three months and six months ended
April 30, 2007, respectively, and $378,802 and $447,839 for the three months
and
six months ended April 30, 2006, respectively. Stock-based-compensation expense
for share-based payment awards granted prior to, but not yet vested as of
October 31, 2005 based on the grant date fair value estimated in accordance
with
the provisions of SFAS 123 was $0 and $247,057 for the three months and six
months ended April 30, 2006, respectively.
Stock-based
compensation expense recognized for non-employees under other accounting
standards was $495,221 and $1,274,275 for the three months and six months
ended
April 30, 2007, respectively, and $292,766 and $315,674 for the three months
and
six months ended April 30, 2006, respectively.
As
stock-based compensation expense recognized in the consolidated statement
of
operations for the three months and six months ended April 30, 2007 and 2006
is
based on awards ultimately expected to vest, it has been reduced for estimated
forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time
of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.
Revenue
Recognition
We
recognize revenue from the sale of our semiconductor products when evidence
of
an arrangement exists, the sales price is determinable or fixed, legal title
and
risk of loss has passed to the customer, which is generally upon shipment
of our
products to our customers, and collection of the resulting receivable is
probable. To date we have not recognized any revenues related to the sale
of our
semiconductor products.
We
recognize revenue from the distribution of our Film and related products
when
earned and reasonably estimable in accordance with Statement of Position
00-2,
“Accounting by Producers or Distributors of Films” (“SOP 00-2”). The following
are the conditions that must be met in order to recognize revenue in accordance
with SOP 00-2:
|
(i) |
persuasive
evidence of a sale or licensing arrangement with a customer
exists;
|
|
(ii) |
the
film is complete and, in accordance with the terms of the arrangement,
has
been delivered or is available for immediate and unconditional
delivery;
|
|
(iii) |
the
license period of the arrangement has begun and the customer can
begin its
exploitation, exhibition or sale;
|
|
(iv) |
the
arrangement fee is fixed or determinable;
and
|
|
(v) |
collection
of the arrangement fee is reasonably
assured.
|
Under
a
rights agreement with the distributor for our Film, we share with the
distributor in the profits of the Film after the distributor recovers its
marketing, distribution and other predefined costs and fees. The agreement
provides for the payment of minimum guaranteed license fees, usually payable
on
delivery of the completed film, that are subject to further increase based
on
the actual distribution results.
In
accordance with the provisions of SOP 00-2, a film is classified as a library
title after three years from the film’s initial release. The term library title
is used solely for the purpose of classification and for identifying previously
released films in accordance with the provisions of SOP 00-2. Revenue
recognition for such titles is in accordance with our revenue recognition
policy
for film revenue.
Capitalized
Software Development Costs
Capitalization
of computer software development costs begins upon the establishment of
technological feasibility. Technological feasibility for our computer software
is generally based upon achievement of a detail program design free of high-risk
development issues and the completion of research and development on the
product
hardware in which it is to be used. The establishment of technological
feasibility and the ongoing assessment of recoverability of capitalized computer
software development costs require considerable judgment by management with
respect to certain external factors, including, but not limited to,
technological feasibility, anticipated future gross revenue, estimated economic
life and changes in software and hardware technology.
Amortization
of capitalized computer software development costs commences when the related
products become available for general release to customers. Amortization
is
provided on a product-by-product basis. The annual amortization is the greater
of the amount computed using (a) the ratio that current gross revenue for
a
product bears to the total of current and anticipated future gross revenue
for
that product, or (b) the straight-line method over the remaining estimated
economic life of the product. The estimated useful life of our existing product
is seven years.
We
periodically perform reviews of the recoverability of our capitalized software
development costs. At the time a determination is made that capitalized amounts
are not recoverable based on the estimated cash flows to be generated from
the
applicable software, the capitalized costs of each software product is then
valued at the lower of its remaining unamortized costs or net realizable
value.
In
connection with our assessment of our intellectual property, we retained
the
services of an independent valuation firm to value our intangible assets
as of
October 31, 2006. As a result of the valuation, no impairment was deemed
necessary. The valuation does not provide any assurance that the intangible
assets could be sold for their stated fair value. The valuation provides
that
the market will accept this technology and it assumes that we will be able
to
obtain sales or sales contacts related to these intangible assets. Due to
the
early stage of the marketability of this technology, there is no assurance
that
we can achieve the assumptions outlined in the valuation. If we determine
in the
future that our capitalized costs are not recoverable, the carrying amount
of
the technology license would be reduced, and such reduction may be
material.
We
commenced amortization of capitalized software development costs during December
2005 and recorded amortization expense of $270,363 and $530,666 during the
three
months and six months ended April 30, 2007, respectively, and $212,536 and
$315,232 during the three months and six months ended April 30, 2006,
respectively.
RESULTS
OF OPERATIONS
COMPARISON
OF THE THREE MONTHS AND SIX MONTHS ENDED APRIL 30, 2007 AND THE THREE MONTHS
AND
SIX MONTHS ENDED APRIL 30, 2006
REVENUES.
We had no revenues for the three months or the six months ended April 30,
2007.
Revenues for the three months ended April 30, 2006 were $18,698 and for the
six
months ended April 30, 2006 were $58,874, and were entirely from our
entertainment business. Revenues decreased 100% for both the three months
and
six months ended April 30, 2007 as we received no guarantee or license payments
related to the distribution of our Film during the period. No revenues were
recorded in connection with our semiconductor business during the three months
or the six months ended April 30, 2007 and 2006.
OPERATING
EXPENSES.
Operating expenses primarily include the amortization of technology license
and
capitalized software development fees, research and development expenses
in
connection with the semiconductor business, and selling, general and
administrative expenses.
Total
operating expenses increased 1% or $26,295 to $1,840,388 for the three months
ended April 30, 2007 from $1,814,093 for the three months ended April 30,
2006.
This slight increase is due to the combination of an increase in software
amortization of $57,827, or 27%, from $212,536 for the three months ended
April
30, 2006 to $270,363 for the three months ended April 30, 2007. Also, research
and development costs increased 208%, or $109,390, to $161,946 for the three
months ended April 30, 2007 from $52,556 for the three months ended April
30,
2006. This was primarily due to the increase in compensatory elements of
stock
options granted since the hiring increase began in late April 2006. Both
of
these increases are offset by the decrease for the three months ended April
30,
2007 of $140,922 or 10% in selling, general and administrative expenses,
primarily due to decreases in professional fees related to the filing of
a
registration statement in April 2006 which were incurred during the three
months
ended April 30, 2006.
Total
operating expenses increased 49% or $1,386,677 to $4,195,581 for the six
months
ended April 30, 2007 from $2,808,904 for the six months ended April 30, 2006.
This increase is due to the combination of an increase in software amortization
of $215,434, or 68%, from $315,232 for the six months ended April 30, 2006
to
$530,666 for the six months ended April 30, 2007. Also, research and development
costs increased 488%, or $672,020, to $809,620 for the six months ended April
30, 2007 from $137,600 for the six months ended April 30, 2006. This was
primarily due to the increase in employees since April 2006, from one engineer
at the end of April 2006, to an engineering vice-president, and five engineers,
plus three consultants and a technical assistant. Finally, there is a 21%
increase in selling, general and administrative costs, from $2,356,072 for
the
six months ended April 30, 2006 to $2,855,295 for the six months ended April
30,
2007. This increase is also primarily attributable to increases in employees,
from four administrative employees at the end of April 2006 to an increase
which
included a Controller, an Executive Vice President of Sales, and a Marketing
Manager, plus four consultants and two marketing sub-contractors. This increase
has been offset by a reduction in professional fees related to the filing
of a
registration statement in April 2006 which were incurred during the six months
ended April 30, 2006.
Amortization
of technology licenses and capitalized software development fees was $270,363
for the three months ended April 30, 2007 as compared to $212,536 for the
three months ended April 30, 2006. This is due to the increase in capitalized
research and development costs and the purchase of technology from 1021
Technologies, Inc. and 1021 Technologies KK during the year ended October
31,
2006. Amortization of technology licenses and capitalized software development
fees was $530,666 for the six months ended April 30, 2007 as compared to
$315,232 for the six months ended April 30, 2006. This is also due to the
increase in capitalized research and development costs and the purchase of
technology from 1021 Technologies, Inc. and 1021 Technologies KK during the
year
ended October 31, 2006, plus the recognition of 1.5 more months of amortization
for the six months ended April 30, 2007 than for the six months ended April
30,
2006.
Research
and development expenses increased by 208% or $109,390 to $161,946 for the
three
months ended April 30, 2007 from $52,556 for the three months ended April
30,
2006. This increase is principally attributable to the increase in employees,
as
referred to above, for the year ended October 31, 2006 and increasing salaries,
payroll taxes and benefits for the three months ended April 30, 2007, as
compared to using outsourced consultants during the three months ended April
30,
2006. For the six months ended April 30, 2007, the increase was 488%, from
$137,600 for the six months ended April 30, 2006 to $809,620 for the six
months
ended April 30, 2007. In addition to salaries, wages and benefits of $185,694
associated with these employees, the compensatory element of stock option
issuances recognized for the six months ended April 30, 2007 was $443,432,
the
majority of which is accounted for by a share-based payment valued at $395,000
to eSilicon, the initial payment required to commence pre-production work
for
Release 2.0 of the Cupria product line. For the six months ended April 30,
2006,
there were no salaries, wages and benefits, and compensatory element of stock
option issuances recognized for research and development was only $26,860.
Also,
for the six months ended April 30, 2007, consulting expense for research
and
development activities was $102,100 as compared with $12,920 for the six
months
ended April 30, 2006. This is primarily because during the three months and
six
months ended April 30, 2006, most of the technical and engineering work to
complete the new Cupria releases was being performed by Hellosoft, the costs
for
which were being capitalized to capitalized software. Finally, purchasing
of
research and development materials increased for the three months ended April
30, 2007 to $17,768 from $0 for the three months ended April 30, 2006, and
increased to $55,333 for the six months ended April 30, 2007 from $0 for
the six
months ended April 30, 2006.
Total
selling, general and administrative expenses decreased 10% or $140,922 to
$1,408,079 for the three months ended April 30, 2007 from $1,549,001 for
the
three months ended April 30, 2006. The decrease is primarily the result of
an
increase in salaries and wages due to an increase in employees, having added
three full-time employees during the year ended October 31, 2006, offset
by a
decrease of $201,765 in legal and accounting fees from the three months ended
April 30, 2006, again, these 2006 amounts were driven by professional fees
related to the filing of a registration statement. We had three full-time
employees and one part-time employee for the three months ended April 30,
2006.
The increase of 21% or $499,223 to $2,855,295 for the six months ended April
30,
2007 from $2,356,072 for the six months ended April 30, 2006, was primarily
caused by the increase in headcount referred to above, including an increase
of
$75,081 in the compensatory element of stock options granted, from $983,710
for
the six months ended April 30, 2006 to $1,058,791 for the six months ended
April
30, 2007. Additionally, one marketing strategy was to invest in the development
of an independent Special Interest Group, established for the benefit of
promoting IPSL. The consulting expenses associated with this activity were
$22,666 for the three months ended April 30, 2007, and $49,332 for the six
months ended April 30, 2007. There were no such expenses during the three
or six
months ended April 30, 2006.
OTHER
(INCOME) EXPENSES.
Other expenses-net included interest income, interest expense, a gain/loss
on
the change in fair value of derivative liabilities, amortization of deferred
financing costs, gain on forgiveness of principal and interest on a promissory
note, and a loss on exchange of notes payable into common stock. In total,
for
the three months ended April 30, 2007, there was income of $1,718,569 as
compared with a loss of $7,881,451 for the three months ended April 30, 2006.
For the six months ended April 30, 2007, there was a loss of $3,716,722,
a
decrease of 55% from the loss of $8,244,692 for the six months ended April
30,
2007. Explanations for the changes in individual line items are described
further below.
Interest
expense decreased 98% or $6,498,797 to $154,016 for the three months ended
April
30, 2007 from $6,652,813 for the three months ended April 30, 2006. Interest
expense decreased 63% or $4,957,252 to $2,940,517 for the three months ended
April 30, 2007 from $7,897,769 for the three months ended April 30, 2006.
The
decreases are primarily due to the value allocated to the warrants related
to
the 2006 Debentures for the three months and six months ended April 30, 2006
that did not occur in 2007, offset by an increase in amortization and write-off
of debt discount due to increased conversions of our convertible debentures
during the three months and six months ended April 30, 2007 as compared to
the
three months and six months ended April 30, 2006.
We
recognized a change of $1,900,394 on the change in fair value of derivative
liabilities for the three months ended April 30, 2007, a change of $2,360,794
or
513% from $460,400 for the three months ended April 30, 2006. The gain was
due
primarily to a decrease in the market price of our common stock during the
three
months ended April 30, 2007 as compared to three months ended April 30, 2006.
The closing market price of our common stock was $0.097 and $0.125 per share
as
of April 30, 2007 and 2006, respectively. In general, decreases in the market
price of our common stock as compared to the exercise price of our warrants
or
options results in decreases in the fair value of the warrant or option as
estimated using the Black-Scholes model. For the six months ended April 30,
2007, we recognized a gain of $361,747 as compared with a loss of $484,538
for
the six months ended April 30, 2006, a difference of $846,285 or 175%. The
gain
was the result of the decrease in the market price of the stock as compared
with
the exercise price of the derivatives, as described above.
The
amortization of deferred financing costs decreased 87% or $283,691 to $41,161
for the three months ended April 30, 2007 from $324,852 for the three months
ended April 30, 2006. The amortization of deferred financing costs increased
105% or $597,028 to $1,165,847 for the six months ended April 30 2007 from
$568,819 for the six months ended April 30, 2006. The increase is primarily
a
result of the conversions of the 2006 Debentures during the three months
ended
January 31, 2007. Upon conversion or repayment of debt prior to its maturity
date, a pro-rata share of debt discount and deferred financing costs are
written
off and recorded as expense.
Other
expenses were also higher during the three months and six months ended April
30,
2006 due to the loss recognized on exchange of notes payable into common
stock
of $446,386.
Other
income in the six months ended April 30, 2006 consisted primarily of a gain
on
forgiveness of principal and interest on a promissory note (the “Zaiq Note”) to
Zaiq Technologies, Inc. (“Zaiq”) of $1,169,820. The Zaiq Note was entered into
in April 2005, had an original principal amount of $2,392,000 and was originally
due and payable in April 2007. Pursuant to the terms of the note, the principal
amount of the note decreased by $797,333.33 on each of the nine and 12 month
anniversaries of the note. In December 2005, when we would not have otherwise
been required to make a payment under the Zaiq Note, we entered into a letter
agreement with Zaiq pursuant to which we agreed to repurchase from Zaiq for
$200,000 the remaining balance of the Zaiq Note and 5,180,474 shares of our
common stock held of record by Zaiq. We had the right to assign any or all
of
our purchase commitment under the letter agreement. We assigned to an
unaffiliated third party that had been a prior investor in the Company the
right
to purchase 4,680,620 of the Zaiq shares. On December 20, 2005, we purchased
the
Zaiq Note and 499,854 shares of our common stock held by Zaiq for an aggregate
purchase price of $129,789. The Zaiq shares we repurchased have been accounted
for as treasury stock, carried at cost, and reflected as a reduction to
stockholders’ equity. The remaining principal and accrued interest of $1,292,111
on the Zaiq Note was canceled resulting in a gain of $1,169,820.
Other
income primarily represents interest earned on short-term investments and
favorable cash management positions for the three months and six months ended
April 30, 2007.
NET
LOSS.
For the three months ended April 30, 2007 our net loss decreased 99% or
$9,555,027 to $121,819 from $9,676,846 for the three months ended April 30,
2006. For the six months ended April 30, 2007 our net loss decreased 28%
or
$3,062,419 to $7,912,303 from $10,974,722 for the six months ended April
30,
2006, primarily as the result of decreases in interest expense and the gain
on
the change in fair value of the derivatives, offset by increases in amortization
of deferred financing costs, increases in operating expenses, and the gain
on
forgiveness of principal and interest on the Zaiq Note.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
was
$286,176 at June 8, 2007, $287,272 as of April 30, 2007, and $2,090,119 as
of
October 31, 2006.
Net
cash
used in operating activities was $1,929,641 for the six months ended April
30,
2007, compared to $1,350,482 for the six months ended April 30, 2006. The
increase in cash used in operations was principally the result of the following
items: